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Dividends Alone Are Not Good Enough

Sysco is another name that has left buy-and-hold investors holding the bag.
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I wrote somewhat negatively about Sonoco Products (SON) yesterday. Sonoco is a financially solid company that has not delivered for continuous shareholders since 2007.

Another iconic "income" name that has underperformed both bank CDs and bonds over the past nine years is Sysco (SYY), the dominant food-service supplier in the U.S.

From fiscal 2004 through fiscal 2012, Sysco grew its earnings by 38.7% cumulatively. Over those eight years, earnings per share advanced from $1.37 to $1.90. The company's fiscal years end on the last Saturday of June. The first half of fiscal 2013 was down 5.3%, leaving current-year expectations slightly below last year's total.

Investors have been justifiably disappointed. Sysco shares topped out at $41.30 in March 2004. They closed at just $34.38 on Thursday. Buy-and-hold types haven't made any money in years, even though they owed taxes each year on the dividends received.

Had Sysco been less pricey back in 2004, things wouldn't have worked out so badly. Unfortunately, the story commanded more than 30x earnings back then. Slow growth over many years allowed for P/E contraction that bottomed in early 2009 at 11x. Buyers then, or near the 2011 and 2012 lows, did well by getting in at bargain multiples.

Over the past full decade, Sysco underperformed 75% of the 1,700 stocks covered in Value Line's main research universe. Its A-plus financial strength, low beta and relative predictability didn't do much good for stockholders.

Insanity has been defined as "doing the same thing over and over while expecting different results," in a quote often attributed to Albert Einstein. Continuing to hold Sysco because you think it will morph into a growth stock might qualify for this definition.

At Thursday's closing quote, Sysco trades for 18.9x trailing earnings and 18.1x the current fiscal-year estimate. After a big one-year run-up, SYY is not cheap enough to be attractive. Anyone holding now should consider selling. Income seekers should consider re-entering only if the shares retreat to below $29.

At the time of publication, Price had no position in stocks mentioned.